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Your oil company is considering buying the right to invest in an extraction site. In order to do that, youd have to pay $100,000,000 to
Your oil company is considering buying the right to invest in an extraction site. In order to do that, youd have to pay $100,000,000 to the local government upfront. You estimate that this site would be able to extract 50,000,000 barrels of oil over its life of one year. Today, the price of one barrel of oil is $40, while the cost to extract one barrel is $50. There is a 50% chance that prices of oil would increase to $60/barrel, and a 50% chance that prices would stay at $40. The cost of capital for this type of project is 25%. Calculate the NPV of buying the rights to construct the site
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